May 17, 2020 / 4:26 PM / By Fitch Ratings / Header Image Credit: Fitch Ratings
The record number of sovereign rating downgrades this year has not translated into a historically high volume of downgraded debt, which is still below that of previous crisis periods, Fitch Ratings says. Although there have been 29 downgrades of 22 sovereigns (18% of the portfolio), the nominal dollar value of sovereign debt downgraded year-to-date is USD7.4 trillion, or about 10% of global government debt outstanding.
The primary reason is that the majority of sovereign downgrades caused by the coronavirus and oil price shocks have been in lower-rated emerging markets (EMs). Of the 26 EM downgrades so far this year, 17 were rated in the 'B' category or lower, which accounts for less than 3% of global government debt. Developed markets (DMs) account for 32% of rated sovereigns, but 76% of outstanding sovereign debt (the US alone accounts for one-third of global government debt, a share that will increase by year-end). Hong Kong, Italy and the UK are the only three DM downgrades so far in 2020.
There are 31 sovereigns on Negative Outlook, another record high that suggests the value of downgraded debt will rise in the coming 12-24 months. This does not currently imply that the dollar value of sovereign debt downgraded will surpass that seen in previous crises, as the value on Negative Outlook is close to that already downgraded this year, at USD7.1 trillion (two-thirds of those sovereigns on Negative Outlook are sub-investment-grade sovereigns). The eventual number of sovereign rating actions and volume of debt affected in the current crisis will depend on various factors, including the duration of economic disruption and longer-lasting effects on growth and public finances.
For EM sovereigns, the current debt crisis is the third since 2000, with the others being the Turkey and Argentina crises of 2001-2002 and the commodity crisis of 2015-2016. In dollar-value terms, the 12-month trailing sum of EM sovereign debt downgraded is USD4 trillion (23% of outstanding EM sovereign debt) in the current crisis, compared with the peak of USD4.7 trillion reached in mid-2016. The early 2000s crisis involved much smaller dollar amounts, as the 12-month sum never exceeded USD1.6 trillion.
However, the relative magnitudes of the two previous EM crises are reversed when comparing the share of outstanding debt downgraded. In the early 2000s, Argentina, Brazil, Colombia, India, Peru, Turkey and Venezuela were all downgraded, affecting nearly 60% of outstanding EM sovereign debt. The 2016 crisis involved more countries, but a smaller share of outstanding EM debt, at 36%.
In contrast with the early 2000s, of the 15 EMs with the highest dollar value of debt outstanding (each more than USD200 billion), only Argentina, Mexico and South Africa have been downgraded this year. Eight EM downgrades were of sovereigns with less than USD25 billion in debt.
The all-time peak in the 12-month sum of total sovereign debt downgraded was USD25 trillion during the eurozone crisis of 2011-2012, when downgrades were focused on highly indebted DMs. Indeed, this was the only period in which sovereign rating volatility was caused by DM rather than EM rating changes.
Rating changes to individual sovereigns with very high debt clearly affect total volumes. The dollar value of downgraded debt spiked with three downgrades of Japan in 2001, 2012 (coinciding with the eurozone crisis) and 2015 (during the previous commodity shock). The single-month high for downgraded DM sovereign debt was May 2012, at USD14 trillion, when both Japan and Greece were downgraded. In the current crisis, year-to-date downgraded DM sovereign debt amounts to USD5.4 trillion.